Look out Tesla, Here Comes Ford

Tesla's (NASDAQ: TSLA) meteoric rise this year has been nothing short of impressive, up over 250% year to date. The company itself has a lot going for it: its Model S received a 99 out of 100 from Consumer Reports, the best score for an auto in the publication's history. Aside from a quality product, Tesla's visionary CEO Elon Musk can apparently take any far-fetched idea and turn it into business gold. Despite that, I still believe Tesla's valuation has risen too high too quickly and will face competition from auto giants like Ford (NYSE: F) that could give Tesla trouble sooner than you think.

Electric vehicles Ford's share of EVs in the U.S. has grown to nearly 16% this year through June, which is quadruple what it was last year. Ford's success in EVs is part of the reason that it has been able to fuel its overall market share growth in the U.S. by a full percentage point – the most by any full-line automaker, according to the company.

Photo credit: Ford Motor Company press release.

Ford's success derives from a slew of vehicle options, as shown above. Now I understand that Tesla's Model S shouldn't be directly compared to Ford's models because it isn't an apples-to-apples comparison. However, when Elon Musk brings out the mass-produced vehicle at perhaps half the cost of the Model S the lines of competition between Tesla products and Ford's hybrids and EVs will definitely begin to blur.

Those who think that Tesla is the future of the industry may be correct, but those same people often think that juggernauts like Ford, General Motors (NYSE: GM) and Toyota (NYSE: TM) will simply roll over and die – which I believe to be very foolish.

Ford will be expanding electrification engineering jobs by nearly 50% to have more than 500 salaried employees working on research and development. It's also investing $50 million in EV development centers to further strengthen its vehicle quality. In addition to all that, Ford is also doubling its electrification battery-testing capabilities this year helping to speed hybrid and EV development by as much as 25%.

"This investment in new engineers and expanded facilities helps us prepare for growth," said Raj Nair, group vice president, global product development in a Ford press release. "All of us at Ford remain absolutely committed to offering customers a choice of leading fuel-efficient vehicles – from EcoBoost-powered gasoline engines and hybrids to plug-in hybrids and electrified vehicles."

Tesla isn't the only one that has to keep an eye on Ford's progress. According to Ford, last month 64% of C-MAX hybrid buyers switched over from non-Ford brands. Toyota's Prius was the vehicle most often traded in for the C-Max – contributing to why Toyota's share in the EV market dropped eight share points while Ford's claim jumped 12 share points.

Bottom lineOnly time will tell how Tesla fares in the U.S. market as its groundbreaking vehicles continue to gain popularity and perhaps decline in price. Tesla as a company is very impressive and is disrupting an automotive industry that has long been dominated by the same old model of using internal combustion engines. One thing we know for sure is that businesses adapt or die, and as demand grows for vehicles such as Tesla's Model S, you can bet that Ford, GM, and Toyota will eventually join the party in full force by throwing hundreds of millions of dollars into research and development, which will change everything. To put it bluntly, I'm rooting for Tesla but I'm staying on the sidelines and avoiding a long position for now – Ford seems like a safer bet with plenty of room to run for investors.

Savvy investors that bet on the right automaker will see great returns throughout the decade, but which ones are best positioned for the future? China is already the world's largest auto market – and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free – just click here for instant access.

Fool contributor Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford, General Motors, and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

I am hoping that Ford can come out with a real competitive product to Tesla's 3rd Gen vehicle. Something like a Fusion Electric for $30,000-40,000. But I don't think the competitive pressures will be so great that it will force anyone in this space to significantly trim margins. Quite the contrary, I think more manufacturers making more viable options in this category will raise public awareness to the very real viability of an all electric car. There is just so much better about an electric car, and this is similar to how there was just so much better about the first iPhone. As awareness grows, demand will too, and you may even see demand outstrip supply in about 4 or 5 years.

The problem for all other manufacturers, however, is that ONLY Tesla has made significant progress toward curing range anxiety. Other manufacturers will have two options: 1) either adopt Tesla's technologies (which is EXACTLY what Tesla is hoping for), or 2) copy Tesla and create their own propriety charging station/battery swapping network.

Regardless of which option they take, Tesla wins. Either the industry is directly paying Tesla for the use of Tesla's network, or they're playing a semi-permanent game of catch-up.

Tesla is no threat to Ford, and Ford has no interest to threaten Tesla because Tesla sells more Fords than Teslas. Tesla sells about 5,000 cars a year, which is great for a startup, and they probably still lose money, which is expected and will have no effect on long term success. Ford sells 5,000 cars EVERY EIGHT HOURS. Ford will sell 150,000 gas/electric hybrids in 2013, of which half will be sold to people who really wanted a Tesla but couldn't convince themselves to buy one. Guaranteed Ford is rooting for Tesla - right now. Ask me again in 5 years.

StACC made some comments that show significant insight. Here is my bet. More or less the thoughts of StACC will happen. Then, once Tesla gets the battery replacement or rapid charge hurdle figured out, Ford will offer to make all their (electric) cars compatible with Tesla's charging stations, and pay to build out the network nationwide at Ford Dealers, in return for the license to use Tesla's technology. Overnight, we will have cars you pay to purchase and maintain, with no cost to drive.

Alternately, car dealers who want to remain car dealers will build Tesla charging stations at their own cost, come inside and look at our cars while you charge...........oh, and our cars will plug in at any XYZ dealer.

Ford is getting an inordinate amount of credit for good management. People, all they did was start listening to their Engineers, after decades of letting the marketing people say what would sell. That's why Apple is where it is, Engineers run the show. Engineers are the worst gadget hounds of any of us, they naturally will make everything fun, if allowed to.

fpl1954 - Ford has done a lot more than just listen to their engineers. Ford was the only US auto company that survived without going bankrupt and that's because they took out a $26 Bil credit line BEFORE the credit markets froze. That allowed them to survive and continue developing cars while GM and Chrysler went bankrupt. Alan Mulally has been justifiably praised for his remarkable leadership. He also jettisoned all of Ford's other brands and decreed that all cars would be built for all markets.

Tesla sold 5k cars in the 1st qtr and they're on track to sell 21k this year. That's not a lot compared to Ford but it is given the very low volumes they used to produce at. They expect to double that by the end of next year and are also adding a new crossover suv model next year.

StACC - What technology has Tesla developed that allows a greater range? They have simply used a far larger battery than anyone else has to this point. That's also why their car starts at $70,000 and goes to over $100k.

EVs will take off for the general public when they can compete with an ICE vehicle on range and price. The biggest part of the market for cars in the US is midsized sedans like the Camry, Accord and Fusion. Anyone can buy a well equipped version of those cars for under $25k and they all have a range that exceeds 300 miles under all weather conditions. That's what a mass market EV will need to be able to do in order to be really successful. That is dependent on battery technology. You can make a car today that has that kind of range, it will just cost $50+k. You can make an EV for $25k, you'll just have very limited range. The only thing preventing having both is the limits of today's battery technology. Tesla can't build a 300 mile EV for $25k either.

Tesla has built a great car. They also have a good roadmap for expanding production and their product portfolio. But the price of a stock should have some relationship to the profits that the company can generate. At this point, Tesla's stock price is far above any profit stream they will generate and is unsupportable just like many tech stocks have been in the past. They'll come back down to earth at some point and that will leave a lot of investors in pain.

One outfit that I doubt will go any further than hybrids is Hyundai, which in Florida has replaced the now-defunct Crown Vic for senior buyers. Down here the majority of seniors either passed along the "family home" to one of the kids or sold it--and now live in apartments or condos. Where they're not going to be able to plug in a "true EV" for recharge. But all the EV zealots want to ban all internal combustion vehicles. Which will make cars only for rich people like back in the pre-Model T days. Us five-figure-income "proles" will be back to shanks mare, or the bus, or getting mugged on the subway. Which I'm sure won't bother the bourgeoisie who preach the Gospel According To Tesla.

The car industry is suffering from having too many conservative staff members holding back innovation allowing market disruption and by EV cars never getting the proper attention. Only when Ford starts to aim at using EV propulsion in their premium car representing the brand's highest standard of R&D and starts to create car platforms that are designed from scratch to serve an EV car optimally, things will get interesting.

I am remembering "Who Killed the Electric Car". There was a scene it that documentary that showed the items needed for a tune up on a gas powered auto versus an EV. The more EV's built, the more gas powered vehicle support industries will close. Air Cleaners, fan belts, spark plugs, oil filters, injectors etc. There are a lot of people employed in those support industries. I am not sure, how the auto industry feels about them, but they will be out of work.

@hunter3203 I'm not exactly sure how to respond to your technology comment. From your comments, you seem to know a decent amount about Tesla. So the fact that you would make such a comment tells me you are unwarrantedly dismissive of the technology they have developed. Needless to say, Tesla's motor, charging, battery, and battery changing is all more advanced than its competitors' by a significant margin. Other manufacturers are already purchasing their electric drive trains for their vehicles (Toyota and BMW).

Also, you seem to equate competing with the ICE and developing a Camry-level entrant. That's simply not right. You compete with the ICE by releasing a car priced to a certain class (e.g. mid-luxry like the Model S) and give it relatively similar features (or in the Model S's case, superior features). You are right that Tesla is not able to create a car that will compete with the Camry, Fusion, or Altima. At least not yet. Nor will the 3rd Gen be that car. But it will compete with the BMW-3 Series, which sold about 100k last year.

As for the range 250 miles is plenty for almost all purposes. In combination with the super charger network, there are few places you won't be able to go by the time the 3rd Gen vehicle comes out. And that's disregarding the fact that there are a number of promising battery technologies that will be coming out.

StACC - I'm not convinced that Tesla's technology is more advanced than it's competitors, it's just proprietary. SAE has a supercharging standard that allows charging up to 80% and it's being adopted by many manufacturers, not just one. Tesla uses a 85kwh battery to get a range of 265 miles. Nissan uses a 24kwh battery to get 73 miles. It's the same ratio of power to range. Tesla has just aimed at a market that is far less price sensitive and installed a battery that allows near ICE vehicle range.

I think you misread my comments. I said "EVs will take off for the general public when they can compete with an ICE vehicle on range and price." I'm talking about a mass market, not a luxury market. Most of the EV proponents act like Tesla is going to put the big automakers out of business. We're in agreement that they're not even aiming at a mass market, but a luxury one. My point is simply that EVs aren't ready to be mass market vehicles. The average consumer isn't willing to accept the compromises that are required with today's affordable EVs(non Tesla). If and when batteries become affordable enough that may change.

Where are the buyers? Auto sales have recovered well and yet if you remove plug in hybrid cars and just look at EVs alone the sales numbers are junk. They are going to stay that way for 5 to 10 years (or more). Nothing Tesla can do will change that.

Now Ford at least understands that they, like all auto MFGs need to keep up with any new technology. Even if EV vehicles don't ever become mainstream there is plenty that can be learned. Electric motors, for example, have lots of minor differences that can make one design stand out. Knowing what each advantage is will just help any company in the future.

@hunter3203 Tesla's supercharger solution (DC Power) is much quicker than any currently used SAE standard (AC Power) mostly because SAE had to make compromises to get multiple manufacturers to agree to the standard in the first place. Tesla seeks to make a standard through market dominance (ala Microsoft with Windows over the last 20 years).

You are probably right in that it wouldn't take another company all that long to switch to better method, but every time a company decides on a process there are certain lock-in effects. So its not like other manufacturers can just up and change. There are only 2 viable options for the other companies here. One is to completely scrap the SAE standards, but stick together, and build their next gen electrics and plug in hybrids around a different standard (DC based) that can compete with Tesla's supercharger... that would take about 10 major car manufacturers to sit around and agree to how they are going to engineer their next gen cars... so it's not like those negotiations will be quick.

The second option is that they can all split off and do their own thing. They may get better technical results and faster, but by fracturing the market place, they allow Tesla to divide and conquer. Tesla's network will remain the largest, so as a customer, you'll always put the check in Tesla's column in this regard.

Also, you aren't taking two incredibly important factors into account in your Leaf/Model S comparison: the relative weight and performance of each car. The Model S is 1300 pounds heavier than the Leaf. How far do you think the Leaf would go with four 350 lbs people inside of it (the extra 100 lbs accounts for a very petite Tesla driver)? I would venture to guess that one would be lucky to get to get 50 miles out of it. Lets be generous and say 60 miles. That means you need 4.5 leaf batteries to equal a single Model S battery in terms of range. That's 120KWh vs. 85KWh. We're not talking microchips here, every 5% additional efficiency you can squeeze out of a battery is big news.

I think I've made my point, but I'll just note that I haven't even begun to factor in the massive performance difference between the two cars, with the Model S being capable of going 0-60 in 4.2 seconds.

As for your mass-market point, this is not an issue I brought up, but you're right, Tesla isn't pumping out any particular model in the 300,000+ range any time soon. I don't think this will have much of an effect on its success as a business or its stock price for many years to come. But with many of the promising battery technologies such as silicon anodes just around the corner, I expect to see this happen before the end of the decade.

How cool will it be when you can upgrade your car to a battery with 2x the battery life? IMHO, it will be paradigm-shifting cool.

The hybrid concept is stupid and Ford has too many of them as showed. Hybrid cars have 2 different driving systems to maintain. And when you drive solely on battery, it carries that dumb and heavy engine and transmission. You never get idea this stupid. EV is definitely the future.

I believe that Tesla can make 30K EV NOW. But, it won't be as good as Musk likes. When it comes out in couple years, it will make big bangs like Model S. That is the style of Tesla.

The bottom line is ..., if the existing auto industry had done what it should have we would have been driving electric cars 10 years ago.

Without tax payer intervention and allot of people losing big so auto manufacturers could write off big debt auto manufacturers would have already rolled over and be dead! Just hard to see realize when something that big is rolling over while its in process!

Same truth in regard to financial sector. In my opinion financial sector should be paying bit into government ..., not whining, lobbying, and legislating in an attempt to avoid every dollar paid in tax. But then many if not all in these industries are not vested in this society and have no patriotism ..., despite some idiot Supreme Court Justices that seem to think a corporation can volunteer and die fighting for its country ..., since in my opinion that is what it takes to be classified as a person!

Auto industry in recent years reminds me much of Republican Lead Congress.

StACC - SAE has a current DC supercharging standard and it allows charging to 80% of capacity not 50% of capacity like Tesla.

I'm not forgetting anything about how EVs work, but apparently you are. How hard is it to upgrade the motor in an EV? Swapping from say 200 hp to 400 hp is about as easy a thing to do as there is in the automotive world. And it doesn't really affect the range of the vehicle when operating at the same speed. My entire point is to show you that Tesla has not made any big technological leap with regard to the efficiency of EVs. They've simply installed the largest battery thus far and THAT is the reason they have a 265 mile range on their $80+k models. Put a 24 kwh battery in a Tesla and you'll have less than 100 miles of range. Also, Tesla builds their own battery pack out of commercially sourced batteries(I've heard they're Panasonic). Every other automaker has the same availability to the latest battery technologies.

The reason that Toyota and Mercedes have invested in and licensed technology from Tesla is because they don't want to spend a lot of their own money just to meet CA's EV mandate. It's far cheaper for them to just pay Tesla for the powertrain, install it in an existing vehicle(ala Tesla's own Roadster) and avoid CA's EV penalties. CA's EV mandate is also the reason Tesla was even profitable in the first quarter. Tesla has a profit of $11 Mil but received $68 Mil in EV credit revenue. Without that government created revenue they would have lost $57 Mil. CA's EV mandate is also behind the recently announced battery swap scheme. Tesla earns the maximum credit from CA is their car can be refueled to 80% in 15 min. That's how they can afford to build these very expensive battery swap stations. You can find that story on greencarreports.com.

Tesla has made a great car and I think they have a great strategy. They're not trying to compete in the mass market where current technology makes it hard to make a profit. They've gone upmarket and can charge a price where hopefully they'll soon be profitable.

As for the rest of us, we'll need to wait for some of those coming technologies you mentioned before EVs become affordable and capable enough for mass market consumers.

hunter3203 - "The biggest part of the market for cars in the US is midsized sedans like the Camry, Accord and Fusion. Anyone can buy a well equipped version of those cars for under $25k and they all have a range that exceeds 300 miles under all weather conditions."

I think you miss one expectation, which is that when EVs will take off, increasingly more and more people will buy EVs, and fewer and fewer people will buy ICE cars, when demand for gas stations decrease, so will the number of gas stations. By then, no one will be driving any Accord and Camry of yestercentury. Tesla's CEO, Elon Musk has already said that his plan is to produce increasingly more mass-marketable EVs at increasingly lower prices. Many analysts have also missed this important point. Just like Amazon 12 years ago, CEO said that his goal was to build out the infrastructure for easy overnight shipping and easy returns, once customers like it, they will become repeat customers. Tesla Motors is building out its charging infrastructure, they have the first mover advantage, which Moltey Fool always says is one of the most important points to consider when buying an investment.

After the first mover advantage, we also have to consider the track records of success of Elon Musk as compared to Ford has to pay substantial amounts for their toxis wastes over the past century of ICE car production, and that GM has a bankruptcy record.

In the case of Ford, for every EV that they sell, Ford will be selling one fewer ICE car too since their customers choose a Ford EV over a Ford ICE. They will mean loss from the production of ICE cars in the future for Ford and this picture is not that pretty to me. How Ford will do to make up for the loss of selling ICE cars? They have to spend massive amount of money to increase production of their EVs and spend massive amount of money to build a nationwide charging station network. They have to close down ICE production, and at the same time increase production of EVs and EV infrastructure. Versus Tesla Motor's 100% focused on increasing production of their future more affordable EVs. Who will be more efficient as a company. With so many more things Ford has to do to right themselves from selling yester-century ICE cars, Ford will spend more time and efforts in catching up with Tesla, and as long as Ford is not 100% purely focused on EVs and EV infrastructure, it remain difficult for them to catch up to the speed of Tesla.

That is my humble observation. I have said it before when Tesla shares were still under $40. At that time, the short people laughed at my observation. Oh well.

Tesla has nothing to worry about with Ford. Ford does a good job on entry level cars and make a good product but if you look at Lincoln and see how poor their execution is there, there is no reason to believe they can compete with Tesla.